Paul Krugman and his continuing ignorance of Say’s Law

Following the President of France’s adoption of Say’s Law, there has been an article by Paul Krugman, Scandal in France. The scandal, as seen by Krugman, has nothing to do with first ladies but with economic first principles.

I haven’t paid much attention to François Hollande, the president of France, since it became clear that he wasn’t going to break with Europe’s destructive, austerity-minded policy orthodoxy. But now he has done something truly scandalous.

I am not, of course, talking about his alleged affair with an actress, which, even if true, is neither surprising (hey, it’s France) nor disturbing. No, what’s shocking is his embrace of discredited right-wing economic doctrines.

You would think that the way he writes that the recovery that followed the American stimulus has been a light unto the nations and that the US and Keynes have much to teach us about economic management.

Mr. Hollande, in announcing his intention to reduce taxes on businesses while cutting (unspecified) spending to offset the cost, declared, “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”

Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast. Indeed, both France and Europe as a whole are getting dangerously close to Japan-style deflation.

That Krugman is as innocent as the day is long of the actual meaning of Say’s Law is merely evidence that he is like 99% of the profession, who have been mis-educated on a principle that was at the very centre of the classical theory of the cycle. He wouldn’t know that either. It is actually shocking to see someone so ignorant of the things about which he so confidently speaks. Well the fact of the matter is that Krugman is an ignoramus who is continually pushing economic advice that is keeping the American economy low and is impoverishing millions of his fellow citizens.

The European economies, and Australia as well, emerged from the Great Depression faster than we have today because they used classical theory and policy to work things out. The UK famously balanced its budget in 1933, at the very trough of the Great Depression. We cut spending here in 1931 and was the first economy to come out of the Great Depression with the Australian trough being reached in 1932 from which time things continually improved.

Only the American economy, with its Keynesian-Roosevelt road to recovery remained in the Great Depression right up until the US entered the war at the end of 1941.

There’s more to the world economy than the US, and even if that is all Krugman knows, even that should make him just a bit more cautious, perhaps a whole lot more cautious in speaking about things he knows nothing about.

This entry was posted in Classical Economics, Economics and economy. Bookmark the permalink.

23 Responses to Paul Krugman and his continuing ignorance of Say’s Law

  1. The Pugilist

    …the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something.

    Wow. Just wow. Is Krugman really stupid enough to actually believe this statement? Or is he just maliciously stating it that way so he can (like Keynes) continue to beat his strawman into submission?

  2. Brian of Moorabbin

    Granted I’m not particularly well-educated when it comes to matters economic, however the current state of the world economy (particularly comparing the US economy to that of the EU) seems to simply prove the adage:

    “Those who cannot remember the past are condemned to repeat it.” – George Santayana

    It seems to me that Europe is slowly moving out of its fiscal slump, by applying financial austerity measures opposed by Keynesians just as they did during the Great Depression of the 1930s.

    America, on the other hand, is moving deeper into a fiscal slump by applying advice from Keynesian supporters like Krugman just as they did during the Great Depression of the 1930s and which, as you rightly point out Steve, extended into the early 1940s. Indeed it was only the need for the US to adopt accelerated production of wartime materials that pulled them out of the slump and kick-started their economy.

    Some 80 years later, the same thing is happening (a global fiscal slump, though not as bad as the great Depression) – Europe is adopting austerity measures which is slowly pulling it out of the mire; the US instead is sinking deeper, like a drowning man in quicksand, and this time there will be no war (and thus wartime production) that will come along to its rescue.

  3. Tel

    That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast.

    So lack of inflation has now become proof positive of idle resources ?!?

    Well, logically if we pick a country with high inflation (let’s say, Venezuela for example) this would be proof positive that there are no idle resources in Venezuela. Certainly, the government has found a way to keep people working, here’s an example:

    Jean Salero gets up at dawn to clock in for his daily shift at a shuttered beer factory in the Venezuelan city of Barquisimeto. After eight hours of checking valves and taking temperatures of idle machinery, he clocks out to earn his 4,700 bolivar ($746) monthly paycheck.

    http://www.bloomberg.com/news/2013-07-10/venezuela-forces-employment-even-with-shuttered-factories.html

    So there you go, supply does not matter, just worry about demand, and once you can achieve inflation you have a productive economy… Krugman productivity.

  4. Tel

    It seems to me that Europe is slowly moving out of its fiscal slump, by applying financial austerity measures opposed by Keynesians just as they did during the Great Depression of the 1930s.

    Wait a moment, follow Krugman’s own link, here –

    http://krugman.blogs.nytimes.com/2014/01/16/france-by-the-numbers/

    Where is this “austerity” people are talking about? Where? Show it…

    Let’s look at the third graph from the top, there’s an orange line labelled “Gross Debt” so at first glance I said, “Hey, gross debt in France is coming down, I don’t remember hearing about that.” Then I did a double take and looked closely… gross debt is predicted to come down, every year except THIS year. And isn’t that always the prediction? Sure, we will sort out the debt problem… manyana we’ll get to it. That blue line labelled “structural balance” is always negative. The predicted future balance might happen some time in 2018, or it might not. Right now they are structurally negative.

    Let’s go to the second graph from the top, every year the French government runs a deficit, and the overall trend is clearly towards larger deficits (as % of GDP). The trend is away from austerity. So Krugman says the deficits are small, well bit deal, no government can run a deficit big enough to keep Krugman happy. The Greek government spent everything they could possibly manage to spend, and then spent everything anyone would lend to them, and spent until they couldn’t spend no more, and Krugman still calls it “austerity”. There’s no pleasing him.

    I agree with you though, the USA is going the same way as Greece, and they will spend to crunch point. Just a question of when the crunch hits, and how it manifests. I predict that the Fed will be faced with a choice of inflation vs higher interest rates, and Yellen will choose inflation, then everyone will be expected to pretend it isn’t happening.

  5. Andrew

    He predicted the TeaParty666 would drive them into recession by insisting on fairly modest wind back of Obama’s spendathon. Instead, the official unemployment rate has dived and growth recovered to a post GFC high in Q3. Imagine where bond yields would be if they had doubled the stimulus as he prescribed?

    These debt addicts never answer the critical q: “if we do it your way, outline the path to rebalance. Don’t just tell us how to stop the recession today – what happens in 10 years.” Unfortunately if they DID answer, it would likely be gibberish like “so much growth that tax receipts will pay for everything so there’s no cost.”

    Why do people even listen? His area of expertise has absolutely nothing to do with macroeconomics. He probably knows less about it than Cats do.

  6. The Pugilist

    The Greek government spent everything they could possibly manage to spend, and then spent everything anyone would lend to them, and spent until they couldn’t spend no more, and Krugman still calls it “austerity”. There’s no pleasing him.

    If Krugman did the spending it would work just like clockwork. Obviously the politicians just aren’t doing it right.

    I agree with you though, the USA is going the same way as Greece, and they will spend to crunch point. Just a question of when the crunch hits, and how it manifests. I predict that the Fed will be faced with a choice of inflation vs higher interest rates, and Yellen will choose inflation, then everyone will be expected to pretend it isn’t happening.

    Yep. I fear the US will hit a wall pretty suddenly. As soon as a half decent alternative to the USD emerges, they will be in a world of economic hurt. The fact that US treasury bonds continue to be seen as a safe haven astounds me…

    These debt addicts never answer the critical q: “if we do it your way, outline the path to rebalance. Don’t just tell us how to stop the recession today – what happens in 10 years.” Unfortunately if they DID answer, it would likely be gibberish like “so much growth that tax receipts will pay for everything so there’s no cost.”

    How can anyone with any understanding of basic economic principles (the most basic of which is opportunity cost) espouse such ‘magic pudding’ beliefs?
    No wonder Krugman has to attack a caricature of Say’s law. He has to to make himself look sane. No wonder the public thinks economists are mad if they listen to Krugman.

  7. Louis Hissink

    If you want to confuse yourself over Krugman’s argument, follow the link Steve gives to Krugman’s NY Times Op-Ed. Scroll down to Krugman’s link to a refutation of Say’s Law, which is

    Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast. Indeed, both France and Europe as a whole are getting dangerously close to Japan-style deflation.

    On that link we find the following

    From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product. In J. S. Mill’s Principles of Political Economy the doctrine is expressly set forth: “What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange“. [Principles of Political Economy, Book III, Chap. xiv. § 2.]

    Yes, this is chapter two of Keynes’ General Theory (bold is mine), where he famously challenges the (neo)classical view that price changes can generate demand capable of absorbing any level of supply.

    Now the paragraph Krugman’s quote quotes, is from Principles of Political Economy etc etc, but Krugman’s quoter next says its chapter two of Keynes’ General Theory.

    At this stage you should start feeling a little confused and perhaps consider the possibly that Krugman and his quoters actually don’t understand Say’s Law, because Keynes didn’t either. It’s almost worthwhile trawling Keynes’ tome to see what he actually wrote on the subject.

  8. Tel

    Now the paragraph Krugman’s quote quotes, is from Principles of Political Economy etc etc, but Krugman’s quoter next says its chapter two of Keynes’ General Theory.

    Keynes used a quote from J. S. Mill to illustrate what he was arguing against. The overall context was whether money is a neutral intermediary that facilitates trade and nothing more than that, or whether money is a useful tool for government to actively interfere in the economy for human betterment. Also whether unconsumed production leads to saving or just wastage.

    Personally I accept that government can manipulate the monetary supply and thus interfere in the economy, I don’t accept that the outcome is useful… but that leads to the “information problem” and all the Mises stuff. Whether people are better at managing their own affairs or whether they need a supervisor to manage their affairs for them (and of course then the supervisor must need an overseer who in turn needs an administrator, who needs a department head, etc).

  9. Louis Hissink

    Just found the salient passage in Keynes – what Krugman’s quoter quoted is a little different to what Keynes actually wrote; Keynes had no proper citation to Mills, and did not use quotation marks. So I wonder where the Krugman quoter got his quote from…..But now that I have a copy of Keynes I had better read it, I suppose.

  10. The Pugilist

    …supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.

    Yes, this is chapter two of Keynes’ General Theory (bold is mine), where he famously challenges the (neo)classical view that price changes can generate demand capable of absorbing any level of supply.

    Since when did Say’s law, as understood and applied by classically trained economists, mean that? It’s as if he thinks the classical schools ignored the functions, institutional frameworks and problems of the financial sector. In fact, that description would be more aptly applied to himself. After all, if you mentioned malinvestments to him, you’d be likely to get a blank stare or a frothy mouthed rant about Austrians…

  11. Pyrmonter

    @ SK – by what measure did the UK and Australia “exit” the Great Depression in the early 1930s, while the US remained in it?

    Each of those countries had its own experience of entering and departing the GD – the UK a fairly mild experience (compared with NZ, Aust, France, Germany, the US) and reinflated with easy money (that AD side again) after going off gold; Australia administratively devalued, and probably would have needed to however the world had gone, having never fully deflated (or disinflated if you wish) after 1918, and then embarked on “business development” tariffs, quotas and government spending rightly condemned by Niemeyer ; France neutralised its gold influx, then refused to reinflate, before ending up with socialist governments that added sand to slowly moving machinery.

    See Table 2 here : http://www.econbrowser.com/archives/2007/01/jme_1987.pdf ; for an orthodox stimulus treatment of the US, Romer: http://elsa.berkeley.edu/~cromer/What%20Ended%20the%20Great%20Depression.pdf ;

  12. Whalehunt Fun

    Whether people are better at managing their own affairs or whether they need a supervisor to manage their affairs for them

    It sounds as tought Mr Krugman is an example of a small class of people who are sadly, not safe to manage their own affairs; and, for the sake of pity, should have a carer or supervisor. Who is so morally reckless as to allow Mr Krugman to attempt management of the affairs of others. For the good of him and all others, lock him away. Surely two good medicos can be found, to sign him away?

  13. motherhubbard'sdog

    All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate.

    Possibly because French industry is not producing what people want at a price they are willing to pay. A bit of austerity on the wage front, combined with a little reflective thinking on the part of French industry management, could easily fix that.

  14. sdfc

    Steve

    Australia didn’t have a widespread financial crisis in the 30s, we devalued earlier and there was a turnaround in the terms of trade.

    That the US didn’t pass its 1929 GDP until 1941 is testament to the severity of the slump.

    What the hell has Say’s Law got to do with the financial crisis?

  15. This sort of rot just leads people to believe that an economics degree is just another arts degree but with some numbers thrown in…

    Who here would take economics advice from this clown or say Dr Emerson or even former ALP adviser Koukoulas who is still trumpeting wide and loud about Wayne “surplus of deficits” Swann achieving a marginally lower tax to GDP ratio than Howard whilst completely ignoring to tell people how that happened.

    A simple test, if an economist didn’t see the GFC coming then their credentials should be questioned.

  16. Grumbles

    What needs to be done is to increase productivity at the bottom of the cycle this will create both supply and demand, as the economy grows, productivity lags, and this is where things hurt as the cycle turns down. If Productivity is stimulated at this time recovery is easy.

  17. Yohan

    The mistake people make is thinking Krugman is an economist and analysing his pronouncements with rational thought and technical point by point rebuttals.

    He is a big government, statist shill, nothing more, and his economic ideas reflect that.

    Look at Krugmans view of political history. He is so partisan, and so eager to declare Republicans bad, Democracts good, that he does the most absurd and tortured analysis to try and fit history into this neat narrative.

    Then there is the ‘Krugman is always right’ meme. Very cleverly he goes back and looks at the wording of his own past columns, and then carefully constructs a new pronouncement showing how he was right all along. Even when he was completely wrong in the general theme of his ideas, he spins semantics so that he can declare he was actually right.

    There is no one who is more dishonest writing on economic issues today.

  18. But now that I have a copy of Keynes I had better read it, I suppose.

    You assume incorrectly that Krugman is arguing in good faith. You’re talking about a wrongologist who claims he is never wrong. He created a strawman to defend Keynesianism – a theory created to justify statist intervention. He deserves no consideration in any argument. He’s only in it to win it.

  19. sdfc

    Yohan

    Look at Krugman’s view of political history. He is so partisan,…

    He’s no orphan, it’s just that you don’t agree with his point of view.

  20. Yohan

    He’s no orphan, it’s just that you don’t agree with his point of view.

    You obviously have not read much of Krugman. Even people with strong ideology are able to look back in the past and say yes, left or right wing administrations have made bad and good decisions. Most partisan’s from both of the traditional sides of politics do that, especially when there is decades of distance in time between ‘now’ and the events that is being analysed.

    But not Krugman, he takes it to what can only be described as an absurdity. I don’t have time to bring up the dozens of examples of him twisting history, sometimes of things more than 100 years ago, so he can always present right wingers as being evil.

  21. Tel

    When George W Bush used a Keynesian stimulus policy in response to the 2000 recession, Krugman was busy telling everyone how terrible this was. Then when Obama used a Keynesian stimulus policy in response to the 2008 recession, and ran up much bigger deficits Krugman was claiming that the only reason it didn’t work was it should have been even bigger.

    http://www.creators.com/opinion/larry-elder/krugman-bush-s-deficit-bad-obama-s-deficit-good.html

  22. The Pugilist

    What the hell has Say’s Law got to do with the financial crisis?

    Banks funding too many home loans??? A misallocation of capital if ever there was one and due to government interference. Isn’t that a structural issue? Do you think financial crises just fall from the sky like a meteorite?

  23. .

    A simple test, if an economist didn’t see the GFC coming then their credentials should be questioned.

    Did you see it coming, genius?

    Anyone who says this whitout a very profitable record of trading showing purchases of put options on Lehman before March 2007 is simply full of shit.

Comments are closed.